OREANDA-NEWS. Fitch Ratings has affirmed Carlsberg Breweries A/S's (Carlsberg) Long-term Issuer Default Rating (IDR) and senior unsecured ratings at 'BBB' and Short-term IDR at 'F3'. The Outlook on the Long-term IDR is Stable.

The affirmation reflects Fitch's expectation that Carlsberg's credit profile will remain broadly stable and commensurate with a 'BBB' rating, despite ongoing macro-economic and geopolitical issues in eastern Europe, the contribution of which to group profits has reduced over time and accounted for approximately 30% of group EBITDA (excluding central costs) in FY14. Although Fitch estimates FY14 credit metrics will not be fully aligned with the assigned IDR, Fitch views positively the cash preservation measures and leverage target of net debt to EBITDA of less than 2.5x by YE15 as guided by management in conjunction with the announcement of its FY14 results. This demonstrates the commitment by Carlsberg to protect its credit metrics and ratings as well as its ability to tap on certain levers supporting the long-term sustainability of its business.

KEY RATING DRIVERS
Cash Preservation Measures
In response to the challenging market environment in Russia and the significant rouble devaluation, Carlsberg has reviewed its investment and operating plans for 2015, focusing on cash preservation and deleveraging. This demonstrates its commitment to protect its credit metrics and ratings as well as its ability to respond to challenges, underpinning its 'BBB' rating.

Solid Cash Generation Capabilities
Carlsberg announced cash preservation measures for 2015 that include reducing capital expenditures, assigning low priority to M&A, intensifying its cost-rationalisation programmes globally and not only in Russia with the closure of two of its Russian breweries. As a result, we expect Carlsberg to continually generate healthy cash flows. We expect FCF to be around DKK4.5bn and FCF margin of approximately 7% in FY15 which is strong for the 'BBB' rating, and would enable leverage to reduce from its currently high level.

Reducing Importance of Russia
Fitch also believes the increasing importance of Carlsberg's Asian markets (FY14: 23.5% of group EBITDA excluding central costs) and the resilience of western Europe - the largest contributor of group profits (FY14: 53%) - will help reduce Carlsberg's reliance on Russia over the medium to long term. The EBITDA contribution from eastern Europe to the group has declined to 31.2% in FY14 compared with 46.1% (excluding central costs) in FY10.

Stable yet High Leverage
As a result of the cash flow preservation measures, Fitch's revised forecast shows broadly stable leverage for Carlsberg. We calculate based on preliminary reporting funds from operations- (FFO) adjusted net leverage to be 3.7x in 2014, before declining to around 3.4x in FY15. We expect FFO fixed charge cover to be 4.7x in FY15 with a gradual improvement thereafter.

Resilient European Business
Western Europe remains one of Carlsberg's main contributors in terms of group revenue (58.5% in 2014) and group EBITDA (53% in 2014). Following the profit margin improvement in 2014, we continue to expect some additional improvement in EBITDA margin in 2015 driven by the company's Business Standardisation Programme (BSP1) and other efficiency initiatives. More importantly, Carlsberg's consistent market share growth (fourth year in a row in FY14), underpinned by its innovation capabilities and effective sales tools, should further support its growth and market share stability in the oligopolistic beer market in this region.

Delayed Russian Recovery
Volumes in the Russian beer market have declined every year since 2009. In part, this has been driven by a sharp increase in excise duties followed by restrictions on the hours and location of beer sales, including a ban on sales from kiosks. In line with Carlsberg's revised FY15 guidance, Fitch expects that the decline in Russian beer sales in 2015 could reach high single digits (including the full negative impact from the restrictions and further excise duties). However, Fitch believes that Carlsberg will be well positioned to mitigate this through its consistent pricing power given its leading market position in Russia. Together with capacity rationalisation, this pricing power should mitigate the adverse impact on profitability from the persistently weak consumer environment in Russia.

Sustained Growth in Asia
Fitch expects the Asian operations to remain the main driver of Carlsberg's revenue growth for the next few years. Full consolidation of Chongqing Brewery Company Co. Ltd from 2014, combined with increased ownership in other entities in the region, support Fitch's view that sales growth in 2015 should be better than the weak 2014 organic performance especially in China. We also expect steady profitability in Asian markets broadly in line with historical levels.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Devaluation of RUB/USD by 32.6% in 2015 at 57 RUB/USD.
- Moderate 0.2-0.4% sales volumes growth in Western Europe for FY15-FY18, 10% decline in Eastern Europe in 2015 and 2% decline in 2016. Sales volumes growth in Asia is projected at 3.5% for 2015, close to organic sales growth in 2014.
- Modest 0.6% total revenue decline in 2015, followed by low- to mid-single digit annual growth thereafter supported mostly by price-mix effect and further expansion in Asian region.
- 50bps improvement in EBITDA margin in Western Europe region in 2015 underpinned by BSP1 programme and other cost-cutting initiatives, 80bps decline in EBITDA margin in Eastern Europe pressured by declining volumes followed by slight recovery to 30% thereafter. - 80bps decline in EBITDA margin in Asian region.
- Capex spending at DKK4bn in 2015 and around DKK5bn-DKK5.5bn thereafter.
- 25% dividends payout ratio assumed.
- Low probability of M&A.

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
- Continuation of a strong competitive profile leading to group EBITDAR margin above 25% and FCF margin above 7% (FY13: 3.6%) or annual FCF of DKK4bn.
- FFO-adjusted net leverage falling below 2.5x

Negative: Future developments that could lead to negative rating action include:
- A severe decline in operating performance from key markets (e.g. Russia) causing FFO- adjusted net leverage to remain above 3.5x (FY13: 3.49x).
- An erosion of FCF to below DKK2bn or FCF margin below 3.5%.
- A shift in financial policy towards a much stronger remuneration of shareholders, coupled with a decreased M&A appetite.
- A material deterioration of geopolitical tensions in Ukraine/Russia causing a severe negative impact on Carlsberg's operations.